Standard & Poor's rating increase on the fourth largest U.S. railroad to "BB+" with a positive outlook, from BB with a positive outlook, is another milestone in the railroad company's push to achieve high-grade status to shave its borrowing costs and better compete with the much bigger Class I railroad companies.
Its Class I rail competitors include Union Pacific Corp , CSX Corp and Norfolk Southern Corp.
S&P cited Kansas City Southern's improved earnings, debt reduction and reduced interest expense.
"Our rating actions reflect KCS' stronger operating profitability, cash flow adequacy, and asset protection measures," S&P credit analyst Anita Ogbara said in a statement.
The company had been saddled with volatile earnings and expensive debt, carrying interest rates as high as 13 percent, but retired more than $120 million of it in December.
S&P said Kansas City Southern's financial risk profile, though improving, "remains somewhat weaker than most of its Class I peer railroads."
But S&P expects the company's revenues and earnings to continue to strengthen over the next few quarters and into 2013 due to better pricing, rising volumes - particularly in Mexico - and improved operating efficiency, Ogbara said.
The Kansas City, Missouri company's international holdings include Kansas City Southern de Mexico, a primary Mexican rail line that connects the United States and Mexico.
The new rating for Kansas City Southern signals that there is greater than a 1 in 3 chance of an upgrade in the next 12 to 18 months, according to S&P.
Moody's Investors Service in January raised Kansas City Southern's U.S. rating to Ba1 "corporate family rating" with a stable outlook, one notch below investment grade. The rating on the Mexico entity is Ba2 with a stable outlook.
To achieve investment-grade, "it's not so much that the hurdles are high, we want to make very certain that this is a permanent change in the rating," Moody's Senior Credit Officer David Berge said in an interview on Tuesday.
"We know that Baa3 is a very special birthday," he said of attaining the lowest rung of Moody's investment-grade ratings ladder. "It's a matter of showing us they can sustain the credit metrics that are probably a little higher than they are right now." (Reuters)
